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Can a party recover its legal costs in adjudication?

There is a developing trend in adjudication for parties to seek recovery of their legal costs. In most circumstances, this will not succeed, but recent amendments to the UK’s late payment legislation have potentially made available an additional means of recovery. A recent decision of the TCC reveals that claims for legal costs made under the amended legislation are being accepted by adjudicators, but stops short of deciding whether they are well founded at law.

Background

In our previous Law-Now on this topic (click here), we reported on two cases where legal costs were sought in adjudication proceedings. In those, the arguments were based around costs as a head of damages. In the second of those cases (Husband & Brown v Mitch Developments), the judge commented that “to allow the Claimant to recover its costs of adjudication would subvert the statutory scheme which does not allow for such costs”.

However, the argument currently being submitted in adjudications is that the Late Payment of Commercial Debts (Interest) Act 1998 (the “Interest Act”) provides a route to cost recovery.

The purpose of the Interest Act is to discourage late payments. It provides a default rate of interest at 8% over base where a contract does not contain its own remedy for late payment in the form of interest at a rate which would amount to a “substantial remedy”.

However, it also contains provisions at sections 1(1) and 5A(3) allowing a party to recover its “reasonable costs in recovering the debt”. It is this which parties are relying on to seek adjudication costs in cases where the Interest Act is in play.

Lulu Construction Limited v Mulalley

In this recent case a claim was made for debt recovery costs of £47k. The main issue here was whether the adjudicator had jurisdiction to award such costs. On the question of jurisdiction, the court considered that these costs were “clearly connected with and ancillary to the referred dispute and must properly be considered part of it” and therefore the adjudicator did have jurisdiction. On that basis, the court upheld the award.

However, the court did not address the issue of principle as to whether or not these costs should be recoverable and, in particular, the seeming conflict between the Interest Act and the regime of the Housing Grants Act and statutory Scheme. The debate therefore continues.

Regardless of the rights and wrongs of this, the clear message is that these claims are being made and some adjudicators are prepared to make awards of costs on the basis of them. The sums at issue can be large.

Conclusion

There is an easy way to avoid this though by some simple drafting. If a contract contains a “substantial remedy” for late payment (for example interest at a suitable rate) then the Interest Act is not engaged and nor is this provision in section 5A(3). It is worth noting that the Interest Act can be in play in unexpected circumstances, as evidenced in John Sisk & Son v Carmel Building Services (click here for our Law-Now on that case), and it is therefore well worthwhile undertaking a review of contracts, even if standard forms are being used. References: